Celtic Tiger leads the eurozone's housing price recovery but OECD warns of
dangers of a new credit-driven bubble five years after crash

House prices in Europe are finally on the mend five years after the financial crisis gave way to collapsing property bubbles in Spain and Ireland.

The two crisis-hit nations - which suffered devastating property crashes that brought down their respective banking systems - are now experiencing the fastest house price growth in the eurozone, according to the European Central Bank's latest economic bulletin.

Residential property prices in Ireland grew by 9.4pc year-on-year in September and have boomed at a blistering pace after bottoming out in 2013.

Ireland's housing boom. Source: OECD

Ireland has been the "comeback kid" of the eurozone after a property-led boom bought the government to the brink of bankruptcy and an €85bn rescue package from international creditors in 2010.

But rapidly rising house prices still pose one of the biggest risks to financial stability, said the OECD. The think-tank noted that an uncontrolled property boom would "increase vulnerabilities, especially if it were associated with further indebtedness".

"Now is the time to build resilience against future nasty surprises while ensuring the recovery is sustained"

OECD on Ireland's nascent recovery

"Such strong price rises may again spark a reinforcing spiral of higher property prices and credit leading to another misalignment of property prices and eventual burst that causes large losses in the banking sector," cautioned the OECD.

"To avoid repeating past mistakes, now is the time to build resilience against future nasty surprises while ensuring the recovery is sustained, and its benefits broadly shared,” said Angel Gurría, secretary general of the OECD.

The government should take measures to cool the market, such as avoiding subsiding first-time buyers and encouraging growth in the rental market, recommended the Paris-based think-tank.

Elsewhere in Europe, countries which escaped debt-fuelled property bubbles, such as Germany and Austria, have enjoyed robust house price growth since 2007. But prices in France and Italy have continued to decline since their pre-crash peaks.

The continent’s housing recovery has been milder than those following previous boom-bust cycles, said the ECB. It attributed the current revival to rising income growth, higher employment and a low interest-rate environment. The research found that mortgage lending rates have also fallen by 0.9pc on average since 2013.

"Housing markets in countries which have already corrected previous excesses in house price growth are likely to benefit more from the current favourable environment in terms of low interest rates and improving macroeconomic conditions, and vice versa," said the report.

But dampening fears that Europe was again on the brink of a dangerous new bubble, the ECB said credit growth remained muted, "limiting the build-up of systemic risks to the euro area financial system".

Economic Bulletin: The upturn in house prices is favourable for the macroeconomy and has posed little risk for financial stability up to now